Illinois Supreme Court Holds That the Implied Warranty of Habitability Does Not Extend to Subcontractors

The implied warranty of habitability allows a homeowner to recover damages for latent defects that interfere with the intended use of a home. In Sienna Court Condo. Ass’n v. Champion Aluminum Corp., 2018 IL 122022, 2018 Ill. LEXIS 1244 (2018), the Supreme Court of Illinois held that buyers of new homes cannot assert claims for breach of the implied warranty of habitability against subcontractors involved in the construction of the homes because the subcontractors have no contractual relationship with the homeowners and the damages are purely economic. As the court explained, the implied warranty of habitability is a creature of contract (not tort) and, therefore, only exists when there is contractual privity between the defendants and the homeowners.

In Sienna, a group of condominium unit owners alleged that their new homes contained latent construction defects and asserted claims against the various parties involved in the construction and sale of the homes, including claims against the defendant subcontractors for breach of the implied warranty of habitability. The plaintiffs contracted with the property developer to purchase the homes, but the plaintiffs had no contractual relationship with the subcontractors involved in the construction of the homes. The Sienna court, overturning the decisions of the trial court and the appellate court, granted the subcontractors’ joint motion to dismiss the plaintiff’s claims for the implied warranty of habitability because the plaintiffs had no contractual relationship with the subcontractors and the damages were purely economic.

The court’s ruling was based upon the “economic loss rule,” which preserves the distinction between tort and contract claims and denies plaintiffs a tort remedy when their complaint is rooted in disappointed contractual or commercial expectations, i.e., economic loss. The Supreme Court of Illinois defines “economic loss” as “damages for inadequate value, costs of repair and replacement of a defective product, or consequent loss of profits – without any claim of personal injury or damage to other property. . .” Moorman Mfg. Co. v. Nat’l Tank Co., 435 N.E.2d 443 (Ill. 1982). In Sienna, the plaintiffs’ damages were purely economic because the plaintiffs’ homes were the only items that were damaged and, therefore, the plaintiffs’ claims were solely based in contract. Since the plaintiffs had no contractual relationship with the subcontractors, the plaintiffs could not sustain their implied warranty claims against the subcontractors.

The plaintiffs argued that the court should sustain their claims against the subcontractors for breach of the implied warranty of habitability because, otherwise, they would be left with no judicial remedy because the property developer (i.e., the only party with whom the plaintiffs had a contractual relationship) declared bankruptcy before the lawsuit was filed. The Illinois Supreme Court rejected this argument and explained that the bankruptcy of a defendant is a risk faced by every civil litigant.

The Sienna holding establishes that a claim for a breach of the implied warranty of habitability for a new home in Illinois can only be sustained against parties with a contractual relationship to the homeowner (e.g., developer or general contractor) when the damages are purely economic, regardless of whether the defendants with privity to the homeowner are solvent.